MUMBAI: With the turbulence in the US and European banking sectors, the Federal Reserve’s direction at a crucial monetary policy meeting is expected to help the Indian rupee and government bond yields this week.
A historic transaction involving the acquisition of Credit Suisse by UBS Group AG for $3.23 billion was completed on Sunday after standing swap lines provided market participants with assurances of a plentiful supply of dollars.
When the market reopen on Monday, this action may offer the market some immediate relief. The non-deliverable futures market for the rupee revealed a depreciation of the currency at opening.
The rupee dropped 0.62% last week to settle at 82.5525 to the US dollar as risk aversion increased due to concerns about the global financial crisis and uncertainty over the Fed’s future move.
The US central bank is expected to raise interest rates by 25 basis points (bps) on Wednesday, although there have been calls for a halt.
The rupee should stay in the range of 82.00-82.75 till the Fed meeting this week, according to a dealer from a public sector bank.
The path of the currency will therefore be determined by the evolution of the Fed’s dot plot, commentary, and banking upheaval, he continued.
We maintain our positions because things could get worse, said Jairam Krishnamurthy, founding partner and chief operating officer of Almus Risk Consulting. The rupee could burst through 83 and shortly challenge 84.
In the meantime, after a drop in US yields amid banking upheaval, India’s benchmark bond yields decreased 8 basis points last week to end at 7.3511%, ending two weeks of relative calm.
But, according to Ashish Vaidya, managing director and head of treasury and markets at DBS Bank India, there is unlikely to be a significant decline in the domestic fixed income and FX markets.
Nigel Fu, head of Asian fixed income at First Century Investments, agreed with this viewpoint but noted that Indian debt market valuations were high when compared to American rivals.
The rupee has performed worse than other Asian high-yielding benchmarks, which makes investing in Indian government bonds even less appealing, according to Fu.
This week, market participants anticipate a rise in the benchmark bond yield in the range of 7.32%–7.42%.
Traders claimed that in addition to the Fed, India’s borrowing strategy for April to September could also serve as a significant catalyst.
Due to a local holiday, India’s foreign exchange and debt markets will be closed on Wednesday.
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